Daily Archives: September 6, 2013 @ 3:09 pm (Friday)

Notes from latest Merrill report

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FYI, from Merrill:

Cliff notes Forgotten, but not over The sequester may be forgotten, but it’s not over. Contrary to popular belief, it appears that most of the impact on growth comes in 3Q, not 2Q. This is one reason our tracking model is pegging growth this quarter at just 1.6%. The Federal workforce is shrinking Federal payrolls have been shrinking since the first half of 2011, but the pace has picked up since the beginning of this year. This reflects some layoffs, but mainly hiring freezes, natural attrition and presumably some workers balking at accepting the shift to part-time employment. Thus, the sequester simply is accelerating a drop that was already in progress. Government wages are falling Aggregate income of government workers has been falling since the end of last year. This reflects not just the drop in employment, but recently reduced hours from the furloughs. In particular, the Department of Defense began furloughing 640k employees on July 8. Doing the math, cutting work by two days a month would cause income to drop by $6.5 bn at an annual rate. That alone could explain the 0.5% drop in government wages and salaries July, which was the biggest mom decline since February 1993. Sequester’s impact is not evenly spread Surveys suggest that most Americans feel unaffected by the sequester. However, regions with heavy concentrations of federal workers or government contractors are feeling the pain. Even as the national unemployment rate continues to drop, there has been a notable pick-up in unemployment in Maryland and Virginia since hitting cyclical lows in April. Anecdotal evidence suggests more pain is on the way The latest Fed Beige Book suggests more pain in the pipeline. In the September 4 edition, there were nine references to sequester or sequestration versus only one reference in the July release. Defense firms in the Kansas City and San Francisco districts reported “that the effects of the sequestration have already been passed through to actual reductions in production.” Meanwhile, defense firms in the Boston region were concerned “about the prospect of larger effects in the fourth quarter.”

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NFP/Fed Chair Nomination Timing

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Karim writes:

NFP Key Takeaways

  • Several sub-texts, mainly that the softer news was in prior months and that the better news was in the most recent month (August).

Yes, though August is subject to revision, and the underlying ‘private payroll’ growth, which lags fiscal adjustments, is now looking like it’s been hurt by the year end tax hikes and subsequent sequesters.

  • Net payroll revisions of -74k definitely the soft side of this report; with a 169k gain for August close to expectations.


Yes

  • The Income proxy at +0.7% for August (jobs x hours x wages) definitely the strong side of this report.


Yes, though Friday’s +.1 for personal income is more ‘macro’

  • The rise in the diffusion index from 55 to 59 also good news as job gains are more broad based.

Ok, fewer jobs but more spread out.

  • The U6 measure fell from 14% to 13.7%, and most other measures of underemployment also fell.
  • The Unemployment rate fell from 7.4% to 7.3% as the 312k drop in the labor force offset the 115k drop in the household survey
  • The Part rate is now at its lowest since 1978-which will most certainly fuel the structural vs cyclical debate

Yes, as it looks like un and under employed are transitioning to ‘out of the labor force’, and participation rates are falling for younger people as well and if you say half the drop in participation is cyclical you can add about 4% to the un and under employment rates.

  • This outcome shouldn’t effect tapering at the September FOMC meeting and if anything, may accelerate the pace of tapering given how close we are to the 7% unemployment rate level that Bernanke identified in June as being consistent with the end of QE.

Agreed. The Fed is heck bent on tapering. They don’t like QE as a tool. And Jackson Hole had presentations showing it doesn’t work with regards to output, employment, CPI, etc.

  • Its highly doubtful the part rate will influence the tapering decision as Bernanke knew full well in June that the part rate was on a long-term decline when he set the 7% level (the same as when the Fed set the 6.5% threshold last December). I expect a more nuanced discussion of the part rate in speeches and the minutes.
  • Recall, payrolls were averaging 90k/mth when the Fed set out on QE3.

And the term structure of rates was lower, questioning what QE actually accomplishes in that regard, as it’s still going full force at the moment.

  • Any decision not to taper or to draw out the taper next year would be more due to the signaling qualities of QE (they wont be hiking as long as they are buying).

A few observers have also pointed out that August payrolls have had upward revisions in 11 of the past 13 years. This is possibly due to the earlier start of the school year over time, which may also have had an impact on the labor force dynamics. Chart below from SMR.


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New Fed Chair

  • Its increasingly expected that the nomination of the new Fed Chair will take place between the Sep 18 FOMC meeting and the Annual IMF/WB Meeting in DC on October 11-12.
  • I’d put the odds on Summers around 75%.


Confirmation is another story, of course. But seems his odds of confirmation should be better than, say, Jamie Dimon… ;)

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private payrolls

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This chart is private sector jobs as per the nfp payrolls report. Decide for yourself whether the govt. ‘getting out of the way’ is altering the ‘underlying strength’ of the private sector, thanks!

As for 2014, if we get there with positive growth from here, that implies credit expansion will be sufficient to generate that growth and feed the automatic stabilizers, will bring the deficit down further as a ‘price’ of that growth, which then requires that much more credit growth to sustain growth, until growth and the fiscal stabilizers do reverse, as they always do.


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JPM exits student loan biz

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The student loan bubble is starting to burst

By John Carney

September 5 (CNBC) — The largest bank in the United States will stop making student loans in a few weeks.

JPMorgan Chase has sent a memorandum to colleges notifying them that the bank will stop making new student loans in October, according to Reuters.

The official reason is quite bland.

“We just don’t see this as a market that we can significantly grow,” Thasunda Duckett tells Reuters. Duckett is the chief executive for auto and student loans at Chase, which means she’s basically delivering the news that a large part of her business is getting closed down.

The move is eerily reminiscent of the subprime shutdown that happened in 2007. Each time a bank shuttered its subprime unit, the news was presented in much the same way that JPMorgan is spinning the end of its student lending.

“It’s no longer sustainable and not the right place to allocate capital in the future,” HSBC Holdings Group Chief Executive Michael Geoghegan said in a statement the day HSBC shut down its subprime unit in 2007.

“Lehman Brothers announced today that market conditions have necessitated a substantial reduction in its resources and capacity in the subprime space,” the press release issued in August 2007 said.

There is over $1 trillion in outstanding student loans, making it the second largest source of household debt after mortgages. Just 10 years ago, student loans stood at $240 billion. About $150 billion of the total is comprised of private student loans made by banks and other financial institutions, according to a report issued by the Consumer Finance Protection Bureau last year.

The CFPB reported that around $8 billion of private student loans were in default. That number is likely to go higher if interest rates rise because most private student loans, unlike federal loans, are variable rate loans linked to Libor or the prime rate.

JPMorgan’s actually the second big private lender to step away from the business. Last year US Bancorp exited the business. That leaves Wells Fargo & Co., Discover Financial Services Inc., PNC Financial Services Group, SunTrust Banks Inc., and various credit unions as the largest private student lenders. Oh, and of course, Sallie Mae, which was privatized in 2004.

I won’t be surprised if a few more of these lenders decide that they want out of the student loan racket.

Of course, the entity with the biggest exposure to student loan defaults is the U.S. government.

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